The idea of knowing where you stand in the business world is hardly new, but it is one with which the legal industry has struggled for a long time. What other firms do my clients work with? What types of matters are those other firms handling? How much of my clients’ business am I getting? Are my rates competitive? These are all difficult, but essential questions for law firms to answer.
In yet another example of important lessons that can be illustrated by looking outside the legal industry, the American Institute of Certified Public Accountants (AICPA) recently published a blog post on the potential benefits of benchmarking for non-profits. To be sure, non-profits and law firms have distinctly different business models. But the idea that benchmarking can lead to better outcomes for the business and its constituents certainly isn’t diminished by the difference in operating models or profit-making philosophies.
The AICPA article offers a six-step process for benchmarking a business:
- Why — Frame why you are undertaking a benchmarking project.
- What — Define what type of benchmarking study is needed to meet your objectives.
- Who — Gather individuals who need to be involved and organizations with which to compare your organization.
- Collect Data — Identify and collect the relevant data. More on this below.
- Analyze — Crunch the numbers and analyze the results. Discuss lessons learned.
- Repeat — Benchmarking is most effective when it’s part of an ongoing effort of continuous learning and improvement. Most organizations will end up fine-tuning their objectives, leading them back to Step 1 to repeat the process.
Benchmarking Your Firm to Others
The AICPA article also mentions a handy list of metrics that are targets for possible comparisons with peers. I would offer my own as they apply to law firms. These include:
- Annual revenue (gross and per lawyer);
- Profit-per-partner (not as a measure of overall firm health and success, but rather as a measure of attractiveness for potential laterals);
- Number of hours per average timekeeper;
- Key Clients, who else represents them, and how much of their work you do;
- How fast clients pay their bills;
- Number of days for an average matter of a given type;
- Average standard rates by geography and practice area;
- Average negotiated rates by geography and practice area;
- Realization of billings, as both a percentage of standard rate and negotiated rate; and
- Average expenses.
Looking at these types of metrics — combined with good practices around client engagement and feedback — can provide a 360-degree view of a firm’s competitive landscape. A law firm examining these aspects will hopefully have the resources available to it to be able to spot potential internal instability, external threats and client dissatisfaction before any of those problems become too large to handle.
Not examining these types of metrics can have devastating consequences.
Recently, I was speaking to a pricing director who shared a compelling story with me. He knew a partner at the firm was submitting a response to a request for proposal (RFP) to cover a large number of litigation matters for a client with national scope, a pot of business that could have been incredibly lucrative for the partner and for the firm. The pricing director spent considerable time collecting benchmarking data related to rates in the key geographies around the country where matters were most likely to arise during the scope of this representation so the partner could submit a proposal with competitive rates. When the partner was presented with the data, he was dismissive, insisting that he knew what the rates should be and he knew how to price his matters. The firm did not win the bid. In fact, the proposal did not make it past the first round of consideration.
Would the firm have won if the partner had looked at the benchmarks? That’s impossible to say. But it is equally impossible to avoid the conclusion that going into the proposal with a better understanding of the competitive landscape could not have hurt the firm’s chances.